Monday, October 11, 2010

Pinning down when the housing bubble became serious

WASHINGTON (MarketWatch) — Few people saw the housing bubble as clearly and in as much detail as economist Richard DeKaser, who created a city-by-city housing valuation index that showed precisely how overvalued the nation’s housing stock was in 2005 and 2006. ...In early 2005, DeKaser found that 53 metro areas, accounting for 31% of the U.S. housing stock, were severely overvalued by 30% or more and faced a high risk of price correction. The year before, cities that were overvalued had accounted for just 1% of the total value of the nation’s housing stock. By mid-2006, DeKaser’s research showed severe overvaluation in 79 cities, or 40% of the housing stock.

Interesting. While the roots of the housing bubble probably go back decades, Mr. DeKaser may have found the point at which a smoldering problem was fanned into a blaze by excessively loose monetary policy. This would, I think, be about the time the Federal Reserve, either intentionally or not, was using cheap money to hide the credit market effect of an expensive debt-financed "Global War on Terror".